About Pros & Cons of a Direct Listing vs an IPO

Created : March 16, 2023 Author : Pooja Category : Samco account help & support, Basics of stock market, Everything about Investing

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In this article, we will discuss

What are Direct Listings?
Process of Direct Listing
Pros & Cons Of Direct Listings
What is an IPO?
Process of IPOs
Pros & Cons Of IPO
Latest IPO GMP
Direct Listing vs an IPO

When a company decides to go public, there are two main options: a traditional initial public offering IPO or a direct listing. Both have different benefits and drawbacks. So, companies must weigh them carefully before listing them in the stock market. In this article, we will explore the pros and cons of each option and also understand which one might be the best fit for your company. So, whether you're an investor, entrepreneur, or just curious about finance, let's start with our discussion of direct listings and IPOs!

What are Direct Listings?

Without going through an IPO, a company can list its share directly on a stock exchange. This process is known as a direct listing. Direct listings don't involve issuing new shares or intermediate investment banks to promote the listing. They only offer pre-existing shares for sale. This direct listing shortens the time to sell shares and reduces the cost of hiring investment bankers. The DLP (Direct Lending Partner) lists existing private shares directly on an exchange, with the market rather than the underwriter determining the share price. Although, the NSE and BSE have some criteria the company must fulfill. Ben & Jerry's, in 1984, was the pioneering company to use direct listing. Without being able to afford an underwriter, they turned to a DLP and were able to raise $750,000.

Key Features

On the exchange, shares of a company are sold directly to the public.
The traditional gatekeepers of the financial markets, such as investment banks, are not involved in a direct listing.
There are no assurances that sufficient stock will meet demand, so the share price may be volatile, especially when it first comes out.
In a direct listing, companies often don't raise any money. Instead, insiders sell their shares to the general public.
The market determines the opening price based on supply and demand.
If a company doesn't need to raise money through an IPO, direct listing may be a better choice.
The traditional IPO route is much more expensive than a direct listing.
Shareholders can sell their shares instantly after the listing because there is no lock-up period.

Process of Direct Listing

Direct listings have gained popularity in recent years. The direct listing process involves several steps, typically including the following:

Preparation: Every company willing to list its shares directly needs to meet the stock exchange's listing requirements. These typically include a certain minimum market capitalization, a minimum number of shareholders, and meeting various financial reporting and governance standards.
Registration: The company must register with the stock exchange. It should file a registration statement with the SEBI. The registration statement entails the company's financial performance, operations, and risks.
Listing: Once the stock exchange approves the company, the existing pre-existing shares are listed on the stock exchange. Investors can start trading with them.

Pros & Cons Of Direct Lisitngs

Pros

Less likely to underprice because of a conflict of interest ("money left on the table")
Pricing is based on supply and demand (the market sets the price)
Direct listing has immediate liquidity and no 180-day lock-up period.
Keeping existing ownership from being diluted too much
Option to raise capital when needed
Less advisory fees for investment banking (limited involvement)

Cons

Direct listings do not raise new capital like an IPO, which may limit the company's growth initiatives.
Direct listings are usually restricted to existing shareholders and accredited investors, limiting investor participation.
Direct listings don't have underwriters, which may limit the company's ability to sell shares.
Without underwriters, a direct listing's opening price can fluctuate.
Direct listings don't involve a roadshow or other marketing, which may limit the company's ability to attract investors.
Direct listings require less financial and operational disclosure than IPOs.
Direct listings must file with the SEC and report, which can be costly and time-consuming.
Direct listings may not generate as much publicity or brand recognition as an IPO, limiting the company's ability to attract customers, partners, and employees.
Lock-up periods: Existing shareholders may be barred from selling their shares, limiting their profits.
Existing shareholders may lose value or liquidity if a direct listing fails to generate interest or demand for the company's shares.

What is an IPO?

An initial public offering (IPO) is when a company decides to sell shares to the public for the first time. Private companies often go public to raise capital for their growth. When a company goes public, hiring an investment bank to underwrite the initial public offering (IPO) is common. Underwriters work with the company's management and shareholders to set an IPO share price. The underwriters also promise to back up that price with their own money by buying IPO shares directly from the company if they need to. The underwriters will likely hire one or more broker-dealers to help them market and distribute the shares. Investors buy the stock at the IPO to boost their potential investment as the stock price increases. Initial public offerings (IPOs) are common for companies to thank their early investors, founders, and venture capitalists for their investment.

Key Features

To raise funds, an IPO sells company stock.
Instead of listing, savvy banks or brokers underwrite IPOs.
Underwriters can earn large fees for leading an IPO and selling shares.
Underwriters set the initial IPO price and use greenshoes to boost the stock price afterwards.
The underwriter's best clients and large institutional investors get first dibs on IPO stock.
Pre-IPO investors benefit from "first-day pops" in oversubscribed IPOs due to high growth expectations.
Before selling shares, the underwriter verifies financial data and reassures investors.
The company's Form S-1 prospectus provides financial and legal information to investors before and after the stock offering.
An IPO dilutes existing investors' ownership share by selling new shares.

Process of IPOs

The IPO (Initial Public Offering) is when a private company enters the stock market by offering shares to the public. Here are the general steps involved in the IPO process:

Preparing for an IPO: Before a company can go public, it must meet certain requirements and regulations. It includes having a solid business plan, strong financials, and a strong management team. The company need investment banks, lawyers, and CAs to start the IPO process.
Registration with the SEBI: The company must register with the SEBI before launching its IPO. Moreover, the company must provide information like background, financials, business models, revenue, and risk factors to SEBI.
Pricing and allocation of shares: The company and its investment bankers will determine the IPO price. They also decide on the lot allocation of the offering shares.
Marketing the IPO: The company and its investor bankers start advertising to gain market interest before an IPO. This is advertising to attract investors. Business analysts and fund managers receive company highlights. Executives use Q&A sessions, multimedia presentations, group meetings, online virtual roadshows, and more.
Investing on the stock exchange: Once the shares are priced and allocated, they will be listed on a stock exchange. The public can begin to invest in them.

The IPO process can take several months to complete. It can be complex and expensive for the company. However, IPO provides significant benefits, such as access to capital, increased visibility and credibility.

Pros & Cons Of IPO

Pros

IPO helps the company's growth, debt repayment, or new projects.
IPO makes a company's shares easier to buy and sell.
IPO publicity and brand recognition can help a company attract customers, partners, and employees.
Publicly traded companies can use their stock to buy other companies to expand.
IPOs can help a company attract and retain top talent by offering employees stock options or other equity-based compensation.
Going public can help establish a company's share value for future fundraising or acquisitions.
IPOs can help early investors sell their shares and profit.

Cons

Going public can be costly due to underwriter fees, legal and accounting fees, regulatory compliance, and other costs.
IPO filing can take months, distracting management from daily operations.
IPO dilutes existing shareholders' ownership stake.
Investors may pressure public companies to deliver short-term results, which can detract from long-term strategic planning.
Due to IPO, companies must disclose financial results, business strategies, and operational risks.
Existing shareholders may be barred from selling their shares, limiting their profits.
Underpriced IPOs may miss opportunities to raise capital or increase shareholder profits.
Unpredictable and volatile market conditions can make or break an IPO.

Latest IPO GMP (Grey Market Premium) of IPO 2023-2024

Equity	Issue price	Listed Date	Open	Close	Listing Gains (%ge)	CMP	Current gains %ge
Amanaya Venture	23.00	9th Mar	20.10	19.10	-16.96	18.45	-19.78
S V J Ent.	36.00	9th Mar	38.00	36.10	0.28	36.10	0.28
Macfos	102.00	1st Mar	184.00	174.80	71.37	145.60	42.75
Sealmatic India	225.00	1st Mar	225.00	236.25	5	231.75	3.00
Indong Tea	26.00	21st Feb	20.80	21.80	-16.15	13.11	-49.58
Earthstahl	40.00	8th Feb	55.00	57.75	44.38	44.95	12.38
Transvoy	71.00	2nd Feb	71.00	74.55	5	71.00	0.00
Dharni Capital	20.00	31st Jan	18.95	20.25	1.25	20.80	4.00
Eastern Logica	225.00	17th Jan	282.90	283.50	26	200.00	-11.11
Rex Sealing	135.00	12th Jan	137.00	143.85	6.56	136.00	0.74
SVS Ventures	20.00	12th Jan	20.50	21.50	7.5	7.91	-60.45
Radiant Cash	99.00	4th Jan	106.00	104.70	5.76	94.00	-5.05

Data Source: https://www.moneycontrol.com/ipo/ipo-snapshot/listed-ipos.html

Direct Listing vs an IPO

Parameters	Direct Listing	IPO
Objectives	Enjoy additional advantages of going public	Primarily to attract substantial financial resources
Process	Without raising capital or going through underwriters, the company issues a direct listing on a stock exchange.	The company undergoes a lengthy process of filing with the SEBI, selecting underwriters, and marketing to raise funds.
Shares	Companies list their existing shares on the stock market.	By issuing new shares, companies sell a portion of their business.
Dilution	No dilution of existing shares.	Existing shares are diluted.
Medium	Here is no intermediate medium. No underwriters, broker-dealers or investment banks take part in the direct listing.	For new shares, companies pay financial institutions and invest company's investment banks.
Price determination	Market determines the opening price	Underwriters determine the opening price
Lockup period	No lockup period	IPO size determines the lockup period.
Transparency	Limited transparency during the process.	High transparency during the process
Cost	Cheap and affordable	Companies pay significant fees to underwriters and investment banks.
Regulatory requirements	Fewer regulatory requirements than IPOs	More regulatory requirements include filing with the SEC and meeting reporting requirements
Availability	Employees and investors determine share availability.	Newly issued shares are usually readily available in the market.
Brand recognition	Potentially lower brand recognition compared to IPOs	Potentially higher brand recognition due to marketing efforts during the roadshow
Buying process	After stock exchange listing, investors can buy direct listing company shares.	An IPO lets investors apply and bid for lot size.
Shareholder participation	Existing shareholders can sell their shares directly on the exchange.	Existing shareholders typically sell their shares through underwriters.
Publicity	Less publicity compared to IPOs due to limited marketing efforts.	More publicity due to marketing efforts during the roadshow
Risk	Higher risk due to market forces determining the opening price and potential volatility	Lower risk due to underwriters helping to set the opening price and generate demand

Is a Direct Listing Preferable to an Initial Public Offering (IPO)?

Whether a direct listing or initial public offering (IPO) is better from an investor's point of view is dependent upon several variables, including the company's objectives, financial standing, and current market conditions. A direct listing is a method of going public in which no additional funding or underwriters are used. As an alternative, the public can buy already existing shares. Successful brands with a large fan base may benefit from this strategy because it increases liquidity and transparency. In contrast, an initial public offering (IPO) is when a company issues new shares to the public to raise capital through underwriters. This route can help companies raise capital and network with underwriters and institutional investors. A company's circumstances and objectives should inform the choice between a direct listing and an initial public offering. Before making any investment choices, talking to financial advisors and doing some homework is wise.

Conclusion

In conclusion, both direct listings and IPOs have pros and cons, and the decision between the two should be based on the specific circumstances and goals of the company. While a direct listing can provide more liquidity and transparency, an IPO can help companies raise significant capital and build relationships with underwriters and institutional investors. Ultimately, it's important to carefully weigh the options and seek professional advice before making any decisions. If you want to invest in the stock market, consider opening an account with Samco today. With our easy-to-use platform and expert advice, you can start building your investment portfolio and working towards your financial goals. Don't wait! Sign up now and take the first step towards a better financial future!